2018 (8) TMI 720 - HC - Income Tax

Taxability of income / salary received from outside India - receipt of the sum in the assessee s NRE account - during that year, the assessee had the status of non-resident u/s 6 of the Income Tax Act, 1961. - The assessee had received the said sum from his two employers in a Non-Resident (external) bank account, commonly referred to NRE account. Held that - the interpretation be given to sub Section (b) of Section 5(2) of the Act would also apply to Section 5(2)(a) of the Act. The Circular is clarificatory in nature and is applicable for construing the aforesaid provision for the relevant assessment year. In our opinion the authorities under the Income Tax Act did not properly apply the provisions of law to the case of the assessee. We are of the view that the Assessing Officer was wrong in adding the aforesaid sum to the income chargeable to tax of the assessee for the relevant assessment year.

Issues:
Taxability of income earned by a deceased individual, status of non-resident under Income Tax Act, inclusion of income in scrutiny assessment, exemption of income received from outside India, interpretation of Section 5(2)(a) of the Act.

Analysis:

1. Taxability of Deceased Individual's Income:
The judgment deals with the taxability of income earned by the legal heirs of a deceased individual who passed away intestate. The deceased was a marine engineer, and the dispute revolves around the taxability of a significant portion of his income earned during a specific assessment year. The total amount in question is specified, along with the fact that the deceased had non-resident status under Section 6 of the Income Tax Act, 1961. The income was received in a Non-Resident (external) bank account, commonly known as an NRE account.

2. Inclusion of Income in Assessment:
The appeal against the inclusion of the sum in the deceased's income by the Assessing Officer was unsuccessful before the Commissioner of Income Tax and the Income Tax Appellate Tribunal. The Revenue's stance was that the sum received by the deceased in the NRE account from his employers constituted receipt of income in India, thereby making it chargeable to tax under Section 5(2)(a) of the Act.

3. Interpretation of Taxability Basis:
The main question admitted for consideration was whether income by way of salary earned by a non-resident individual for services rendered outside India, not chargeable to tax in India on an accrual basis, could be taxed on a receipt basis merely because the amount was remitted to the individual's NRE bank account in India. The appellant argued that the income earned outside India while the individual was an NRI should not be subject to tax under the Act.

4. Legal Precedents and Circulars:
The appellant relied on a Karnataka High Court decision and a Circular issued by the Ministry of Finance to support the contention that salary accrued to a non-resident individual for services rendered outside India should not be included in total income merely because it was credited to an NRE account in India. The Court concurred with the Karnataka High Court's decision and the Circular, emphasizing that the Assessing Officer had erred in adding the sum to the deceased's taxable income.

5. Judgment and Conclusion:
The High Court allowed the appeal, holding that the sum in question should not have been added to the deceased's taxable income for the relevant assessment year. The Court's decision was based on the interpretation of relevant provisions of the Income Tax Act and the clarificatory Circular issued by the Ministry of Finance. The judgment favored the legal heirs of the deceased individual, ruling in their favor regarding the taxability of the income earned by the deceased during the specified assessment year.

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